Out of the Box: Substantive Entitlement Reform

On Tuesday, the Wall Street Journal reported that China, the largest holder of American debt, has presented a plan to the World Bank to create one international currency. If this news hasn't shook America's belief in itself as a strong nation, it's because too many of the electorate don't understand what the implications are of this attack on a devalued dollar. http://online.wsj.com/article/SB123780272456212885.html

The 2008 Federal budget was just shy of $3 trillion dollars. That works out to the equivalent of $10,000.00 for every man, woman, and child in this country. http://www.cbo.gov/ftpdocs/99xx/doc9957/Historicaltables09-web.XLS

In the first sixty days of the Obama presidency, our leaders have committed over $31,000 in deficit spending for every one of the 300 million people in this country. For a family of four that is $124,000 to fund the stimulus spending bills and fund corporate bailouts for enterprises that "are too big to fail."

In an Associated Press story by Andrew Taylor on March 20, 2009:

White House budget chief Peter Orszag said that CBO's long-range economic projections are more pessimistic than those of the White House, private economists and the Federal Reserve and that he remained confident that Obama's budget, if enacted, would produce smaller deficits.

Even so, Orszag acknowledged that if the CBO projections prove accurate, Obama's budget would produce deficits that could not be sustained.

The president likes to call his stimulus spending plan an investment. But, a growing number of economists are questioning the wisdom of spending ourselves into prosperity. Read the Cato Institutions open letter to the presidents signed by leading economists at http://www.cato.org/special/stimulus09/cato_stimulus.pdf

I don't know anyone who has ever managed to spend themselves into prosperity, but I do know people who have spent themselves into the poor house. Very few people are born prosperous, and most Americans work hard for their money. Savings, investment, hard work, and planning are generally accepted methods used to build wealth and prosperity.

It is clear that without cuts in spending and identified savings in large budget areas, our country will experience unprecedented inflation. The U.S. is currently in a deflationary period. Home prices have fallen and the stock market plummeted. Between October 2008 and today, $11 trillion dollars in U.S. personal wealth has disappeared. That's deflation.

On March 13, 2009 the Wall Street Journal reported:

The wealth of American families plunged nearly 18% in 2008, erasing years of sharp gains on housing and stocks and marking the biggest loss since the Federal Reserve began keeping track after World War II.

The Fed said Thursday that U.S. households' net worth tumbled by $11 trillion -- a decline in a single year that equals the combined annual output of Germany, Japan and the U.K. The data signal the end of an epoch defined by first and second homes, rising retirement funds and ever-fatter portfolios.

Past downturns have been mere blips compared with the losses Americans faced last year, which set them back to below 2004 levels. "In the postwar period, we've never had anything other than very modest declines. That life experience led many people to think that houses were a one-way bet," says Douglas Cliggott, the chief investment officer of Dover Management LLC

The entire story can be read here http://online.wsj.com/article/SB123687371369308675.html

Millions of Americans have lost their job in the last year and there is tremendous downward pressure on wages and earnings. Again, that's deflation.

I can't think of a time in my life where we entered an inflationary period after widespread deflation. I'm really not looking forward to what this impending economic change will do to our nation. But, one thing is certain, massive government spending will result in inflation.

Economist Milton Freedman was quoted as saying, "Inflation is taxation without representation."

The economic downturn has touched nearly every household. This financial crisis is only a few months old, but it is much more likely to take years to correct than the few months most of us have hoped for. There is a palatable financial fear in many homes.

It is clear that there is no bold thinking in Washington on just how to solve the financial problem. The White House and Congress have been working in crisis mode since last October. In the middle of the economic fight for our nation's future, each party has retreated to their ideological corners and forgotten that the problem is bigger than their individual agendas.

FDR's New Deal spending did not lift America out of the Great Depression. The depression did not ease until Americans were fighting World War II on two fronts. It was eight years from the start of the New Deal spending before the GDP rose to pre 1929 levels. Economists will never know whether or not the New Deal was truly successful in righting the U.S. economy.

What the New Deal instituted was unprecedented social welfare spending. Social Security promised the nation would care for the elderly and infirmed. Twenty years later, LBJ's Great Society brought Medicare and Welfare payments to families in need. First President Bush, and Now President Obama have added large corporate entities who are "too big to fail" to the list of welfare recipients.

The well has run dry. China's move on a worldwide currency is the clear signal that the nation cannot count on the traditional world financiers to fund our spending binge. The message is these global economic players cannot count on the United States to manage its finances and pay our bills.

Today, Social Security and Medicare consume nearly half of the federal budget. Each person living and breathing in this country should be contributing $5,000 per year just to pay the current year obligations for those Americans enrolled in the two federal social programs.

But, in the U.S., only 40% of Americans actually pay payroll taxes. So, today's taxpayers are contributing about $8,600 each to fund today's social program obligations for retired and disabled members of our community.

As the number of workers continues to shrink, and the number of retirees collecting benefits grows, the obligations of individual taxpayers grows as well. And without substantive entitlement reform, the U.S. will not be able to maintain its position as a world economic leader. Too many people will be dipping into a well that has run dry.

The Concept of Entitlement is Wrong

The concept of entitlement is wrong and has led to some horrendous outcomes and runaway spending. I feel the most damaging outcome from the war on poverty is the decline of the family, particularly in African American families.

The welfare laws of the 1960s paid mothers more money if there was no father contributing to the household finances. Low income women were rewarded for not having a father in the household. Prior to the 1960 census, only about 7% of all children were born out-of-wedlock. Today, 38% of all children are born to unwed mothers-a five fold increase. But, seven out of ten births of African American children are to unwed mothers-a tenfold change from just two generations ago.  

Before the 1960s marriage, out-of-wedlock births, and divorce rates were nearly identical for all ethnic groups. But there has been a much more dramatic shift in the most impoverished communities in America. The war on poverty has actually been a war on families and the strong community structures that result from stable family units. One of the best books on this subject is The Abolition of Marriage, by Maggie Gallagher. The 1996 book is currently out of print but available in the used book marketplace.

Welfare was designed to be a hand up for those in need, but it transitioned to a handout for many who couldn't, or wouldn't, take responsibility for their lives and living expenses.

In essence, social welfare increased the dependency of many families in poverty's path.

Instead of Entitlement-Empowerment

Many Americans are only two paychecks away from financial ruin. A health crisis, a lost job, and a personal tragedy-these life events can darken every doorstep.

But, what if the government could soften the landing for the vast majority of Americans? What if hose hanging on by the thinnest of rope, those who experience job, housing, food, or healthcare insecurity never had to experience the panic of a financially bad week, month, or year? And what if the federal budget could save billions of dollars in the process?

We need a new paradigm for social services spending that actually encourages families to stay together and pool the resources available for their family unit's long term well being.

It would mean essentially unwinding the New Deal and Great Society. These massive spending obligations that the government instituted but never dismantled when the best intentions of a generous nation met the law of unintended consequences.

It would mean empowering those in need to make changes for their long term wellbeing and giving them the tools to manage their federal benefits. It would mean leveling the playing field for anyone looking for money for a college education, job training, home loan down payment assistance, SBA lending to start a new business, food security, housing assistance, and medical care for the uninsured.

This is a simple, yet wholly radical departure from what we consider the "norm" in social welfare. Many will dismiss this idea without even considering the prospect. Too many politicians, bureaucrats, and others who feed from the public trough will scoff at the notion that Americans are better at managing the public finances than they are. And, too many who profit from the entrenched system will laugh at the prospect that we can cut our nations budget by empowering its citizens.

The Solution is Easy-Abolish Medicare, Welfare, and Social Security

Abolish the systems that distribute nearly half of the federal budget, replace it with a lifetime personal benefit account (LPBA) for every man, woman, and child who is a citizen of this country. Let every adult decide how to manage the money set aside for their health and benefit. Of course there would be a few caveats, but I think the average American has more financial savvy than today's average elected official.

The account could be drawn from and replenished before retirement age under controlled circumstances, but each American would have a fixed amount that they could draw from at time of need. A husband and wife could combine their benefits. Parents could draw from a minor child's benefits for health and education uses that are prudent and in the long term best interest of said minor.

Benefit Calculations

The Social Security Administration sends me a statement on what I can expect to "draw" from my account upon retirement. I'm one of the lucky Americans who can retire with full benefits at 67.5 years under the changes made a few years ago to the retirement age.

If I enjoy an average life expectancy, the Federal government estimated that I will live to be in my late seventies and they will pay me benefits for 12-16 years at approximately $1,400 per month. In real dollars that's $201,000 to $268,000 in social security benefits. Now, I could also live long past my life expectancy and cost the government much more than their actuarial tables predict.

Under the current system, the government will be paying for my health care if I become disabled and/or reach retirement age. I may have a small Medicare premium at retirement, but I am just as likely not to contribute to my elderly healthcare costs.

In 2006, 40% of the Americans surveyed by the Commonwealth Fund, who were making less than $40,000 per year, lived without health insurance at least part of the year in 2005. I'm sure those numbers have only grown in this economically uncertain world. Some very astute politicians think that the only solution to managing the growing lack of accessibility to healthcare is to develop a "single payer," or socialized medicine model, similar to Canada, or Great Britain.

But, what if a citizen of this country could shop for the best health care in the private sector and choose to pay for it from their personal public benefit account? Healthcare would remain a private enterprise, but Americans in need of services could shop for and purchase based on their own short and long term needs. The decision would move to the individual, not the government or insurance company.

Here is an example: Fifty-six year old Average Jane has knee pain and has been recommended for surgery. She would have some choices in her care. She could choose to live with the pain, or take medication instead of a surgery. She could interview three orthopedic surgeons and get competitive bids. Or, she could just settle for what her health plan offers her. With a public benefit account, Jane could choose her doctor, choose her treatment, and choose her payment method (cash, health insurance, or public benefit)-all of her choices would be with her long term best interest in mind. If she didn't have health insurance she could still have a health benefit.

According to a Kaiser Family Foundation report from 2007, the average Medicare cost per patient was $12,763. So, if I am entitled to 12-16 years of Medicare, I have another $153,156 to $204,208 in federal benefits coming my way.

Combining my Medicare and Social Security benefits together, I would have $355,000 in benefits if I live 12 years over retirement, to $472,000 in benefits if I live 16 years over my retirement age in today's dollars.

The Public Benefit Account

The Federal government is constitutionally chartered to provide for national security, interstate commerce, and international trade, and to provide for general welfare. Here is the preamble to the constitution:

We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.

The term "general welfare" doesn't mean personal welfare. It means the welfare of the nation in general. The framers of the constitution always expected the citizens to exercise personal responsibility and accountability. Yet, successive administrations have instituted laws and programs that have restricted individual rights to self-determination.

The public benefit account would return self-determination to the citizens.

The basic concept is simple. The government establishes an equal lifetime benefit for each citizen. Using the numbers from the benefits I can assume I would receive under the existing form of Social Security and Medicare, I'll use the round number of $400,000 to illustrate the Lifetime Public Benefit Account (LPBA).

Over the course of my life, I am never entitled to more than $400,000 in taxpayer supported benefits, unless congress adjusts the benefits for all citizens.

It doesn't matter how much I earn, and it doesn't matter how much it costs to live in the part of the country I choose to live in. I would have no expectation that the taxpayers will ever raise the limit of benefit I can receive in my lifetime.

But, I don't have to wait until retirement to access my benefit.

And, I can deposit funds to replenish my withdrawals at any time in my life.

I can combine my benefits with my spouse, and I can use some of my benefits for the benefit of our minor children.

If I am unemployed, I can use the benefits for food, shelter, and educational or job skills training benefits of my choosing. Once employed, I can replenish my LPBA.

I can be assured my benefits will last longer if I live a healthful lifestyle, maintain my weight, never smoke, don't drink to excess, etc.

I can make a withdrawal at a time of extreme personal need to insure that I have food and shelter.

And, when I'm back on my feet financially, I can replenish the LPBA with pre-tax dollars. I can also deposit additional pre-tax dollars in the LPBA up to 40% over the established account rate.

I can use the LPBA to underwrite a college education that will result in graduation from and accredited college or university.

And, I can use the LPBA for down payment assistance for a primary home at or below the average home price in my region. I can use up to 30% or the LPBA to provide housing security which will benefit me, my family, and my community. The home is an asset that will help control future housing outlays.

I can use my LPBA as security against an SBA guaranteed loan and start a business that will create jobs in my community. If my business fails, I will have to live with the consequences of my decisions that lead to the failure-but the other citizens do not have to underwrite my dreams with their hard work. And, I have an opportunity to replenish my LPBA when I return to gainful earning.

If I am incarcerated, the LPBA will reimburse the taxpayers for the cost of my incarceration. I can replenish my account through my earnings after incarceration. But, there is a long term consequence and accountability to my illegal behavior.

I can pay for emergency and preventive healthcare on the open market with the LPBA. If I need a mammogram, colonoscopy, or other screening procedure. I can catch a potentially life threatening lump, polyp, or other malady and receive less costly early treatment.

I can choose to never use the LPBA. And, it would be considered patriotic to not spend every penny in a LPBA.

Use of the LPBA will be taxed at current year tax rates.

Upon retirement age, I can receive monthly payments based on the actuarial tables, but all payments will stop when I reach the LPBA limit. Or, I can choose to only withdrawal post retirement funds as needed.

Upon retirement, I can pre-determine my end-of-life healthcare plan by establishing a durable power of attorney for healthcare that delineates how any late life or health crisis will be managed. A responsible citizen would have an opportunity to weigh and measure the implications of invasive and expensive end-of-life care.

Any individual or institution may deposit funds in another individual's LPBA. If a charity, employer, insurer, or other benefactor wants to contribute to an individual they are free to do so.

The LPBA would return personal responsibility and accountability to a welfare system that has neither. It would allow Americans to self-determine the best government investment in their future.

Americans in need would receive funds when and where they need them.

It would also give the government the opportunity to deliver job and living skills development to those request assistance at any stage in their life.

A family without food security could attend a shopping and meal preparation workshop and receive additional incentives to make the most of their food budget.

A future homeowner seeking down payment assistance could benefit from a financial literacy for homeowners seminar where they would learn that there is more to home ownership costs than the monthly payment. They would also be counseled in how to read a contract and find home repair professionals.

Military recruits could receive bonus payments to their LPBA instead of GI Bill promises that rarely actually materialize. They could choose to use their military contribution for education, home purchase, or retirement bonus.

$400,000 in lifetime benefits is not life changing money for most Americans. The average family makes just under $50,000.00 per year right now. But, the right amount of money, at the right time, spent wisely can make all of the difference in the world.

I've written a 3000 word broad explanation on streamlining government benefit delivery. It will take a great deal more than this brief out-of-the-box idea to change America.

But, if we don't collectively develop a solution very soon, we will certainly wish we had tried to make our broken system work when we had the chance.

There is no perfect system for taking care of the neediest amongst us. But, we can transition from a society that works to pay the government and then waits with our hands out in our twilight years, to a society that invests in its citizens and reaps the rewards of the investment.

Hopefully, the government will put in place financial literacy training programs and stem the government spending to a point where personal income and payroll taxes are not longer needed to sustain the unsustainable public welfare rolls.